Astrea 7 Or Singapore Savings Bond: Which One Shall I Choose?

With both inflation and interest rates rising, isn’t it an oxymoron to go for bonds, since they are not very suitable in such times which I had stated so myself here? The answer is simple: we still need bonds in a diversified investment portfolio. Also, we had seen some instances of investors moving towards bonds during the ongoing market sellout despite threats from the two “in-“ words, like the United States Treasury yields falling due to demand for bonds¹, thus proving their use as a safe haven.

With our Frasers Property Treasury 3.65% bonds maturing in a couple of days, we are looking for replacements to reinvest the redeemed funds. Besides the current bond ETFs that we are holding, I chanced upon the two Astrea 7 bonds and the Singapore Savings Bond (June 2022 issue).

Let us take a brief look at the three.

 

Astrea 7 Bonds

 

There are write-ups on the details of the Astrea 7 bonds (like here and here), so I shall not delve much into it. Basically, it is a corporate bond issued by Astrea 7 Pte Ltd, which ultimately is indirectly wholly owned by Temasek Holdings. The performance of the bonds is supported by cash flows from a portfolio of private equity (PE) funds, which are generated mainly through the monetization of or exit from investments by the PE funds. For retail investors there are the Class A-1 bonds denominated in Singapore dollars (SGD) with a minimum 5-year duration at 4.125% annual coupon rate, and the Class B bonds denominated in United States dollars (USD) with a minimum 6-year duration at 6% annual coupon rate.

 

Singapore Savings Bond

 

SSB for short, it is a bond backed by the Singapore government, and for the June 2022 issue, the average return rate is 2.53% annually if held over the full tenure of 10 years. The rates of the SSB are determined by a formula that takes reference from the yields of one, two, five and ten-year Singapore Government Securities (SGS).

 

Comparison

 

Besides the facts that both coupon rates and the nature of the bonds differ, we would still need to compare from an investor’s point of view in terms of other conditions. I had made a table for easy viewing and decision making:

 

Bond	Astrea 7 Class A-1	Astrea Class B	SSB (June 2022)
Denomination	SGD	USD	SGD
Minimum application amount (Principal)	SGD 2,000	USD 2,000	SGD 500
Tenure	10 years with mandatory call after 5 years	10 years with mandatory call after 6 years	10 years
Annual coupon rate	4.125% + 1% one-time step up after 5 years (if not redeemed)	6% + 1% one-time step up after 6 years (if not redeemed)	Averaged 2.53% if held for full 10 years
Payout frequency	Semi annual
Credit rating (Fitch)	Expected A + sf	Expected BBB + sf	AAA (rating for Singapore government)
Underlying assets	Private equity funds		NA
Bond seniority	Senior	Lower than Class A-1	NA

 

Fig. 1: Comparison of the bonds.

Risks

 

While all investments carry risks in many forms (which includes a total default), we need to manage in terms of the probability of them happening. I will highlight a couple of risks here that, in my opinion, have a higher probability of happening.

 

Interest rate risk – This risk is real with all the talk about interest rates rising. If the prevailing interest rate is higher than the bond’s coupon rate, then the bond’s value would go below par due to its sell-off by investors going after newer bonds with a higher coupon rate and/or bank deposits with higher interest rates. This is not applicable for SSB as the bond value can be redeemed at par value.

 

Forex risk – Astrea 7 Class B bonds are denominated in USD, which is subjected to foreign exchange risk. Though USD-SGD fluctuates between 1.2x and 1.4x for the past decade, we may not know its direction in the future. With a coupon rate of 6%, you may earn less or more if SGD strengthened or weakened against USD, respectively. On a related note, this also concerns the SGD value of your bond principal should you initially invest at a higher/lower USD-SGD and redeemed at a lower/higher USD-SGD, which could be viewed as an additional loss/gain.

 

Further Points

 

To have a glimpse on how the Astrea 7 bonds might fair, we could see from the past iterations that were listed the last few years: Astrea IV, Astrea V and Astrea VI (incidentally these three used Roman numerals). As of 20 May 2022, both Astrea IV and Astrea V were trading above par (SGD 1.04 and SGD 1.022 respectively) while Astrea VI was below par at SGD 0.99. Coupon rate wise among the four bonds, Astrea IV is the highest at 4.35% and Astrea VI is at 3%, which probably explain why the latter was trading below par. Based on Astrea 7’s higher rates at 4.125% for SGD or at 6% for USD, it might be trading at a premium (i.e., above par) upon listing, ceteris paribus.

 

Being a bond based on PE, the Astrea bonds are holding well so far. However, with an expected recession looming and the recent battering of growth stocks, this may pose a concern as usually PE are associated with growth, though I foresee this as a short-term kink.

 

Assuming all the compared bonds run the full tenure of 10 years, comparing June 2022 SSB’s averaged 2.53% per year, the risk premium is 1.595% (year 1 to year 5) / 2.595% (year 6 to maturity) for the SGD Class A-1 and 3.47% (year 1 to year 6) / 4.47% (year 7 to year 10) for the USD Class B. Class B’s rate is naturally higher to compensate for the risk taken since it is lower in debt seniority and exposed to forex risk. 

 

The Bedokian’s Take

 

The Bedokian Portfolio’s bond selection entails the bond to be at least of investment grade and five years to maturity², to which all the bonds mentioned here had passed. Having reviewed and weighed the factors mentioned here and in other blog posts, we would be allocating between the June 2022 SSB and the Astrea 7 Class A-1.

 

The closing date for the application for the SSB and the Astrea 7 bonds are 26 May 2022 and 25 May 2022, respectively.

 

Disclaimer 

 

Reference

 

Astrea 7 Bond Prospectus – https://www.azalea.com.sg/storage/app/media/reports/Prospectus/astrea-7-pte-ltd-prospectus-19-may-2022.pdf

 

1 – Min, Sarah & McKeever, Vicky. Treasury yields fall, prices climb as investors seek shelter from stock sell-off. CNBC. 19 May 2022. https://www.cnbc.com/2022/05/19/us-bonds-treasury-prices-climb-following-stock-market-sell-off.html (accessed 20 May 2022).

 

2 – The Bedokian Portfolio (2^nd Edition). p108.